Japan Currency-Swap Spreads Narrow on BOJ, Fed Coordination

By Nate Hosoda and Saburo Funabiki

Sept. 22 (Bloomberg) -- Yen currency swap spreads narrowed from their widest level since the Japanese banking crisis in the late 1990s on speculation the Federal Reserve's move to provide dollars to the Bank of Japan will help ease a credit crunch.

Investors exchanging yen for dollar funds are accepting interest payments 42 basis points below the one-year London Interbank Offer Rate, or Libor, for the Japanese currency, according to data compiled by Bloomberg. The figure was as low as minus 53 basis points on Sept. 19. A negative level indicates investors are willing to receive reduced interest payments on the yen they lend to obtain financing they need in dollars.

``Trades to exchange yen for dollars are increasing sharply as the supply of dollar credit shrinks,'' said Takeshi Ogura, the head of the yen capital desk at Bank of Tokyo-Mitsubishi UFJ. ``Stress in currency-swap trading was increasing significantly, so the central bank policy to supply dollars was extremely timely and appropriate.''

The BOJ pumped 12.5 trillion yen ($117.3 billion) into the money markets over the past week, the most in at least six years, as central banks joined forces to avert a financial meltdown after the bankruptcy of Lehman Brothers Holdings Inc. The BOJ last week said it will use a $60 billion arrangement with the Fed to supply dollars to financial institutions.

In currency swaps, a person borrows in one currency and simultaneously lends in a different currency. The trade involves the exchange of two different floating-rate payments, each denominated in a different currency and based on a different index.

Non-Japanese banks are facing the highest premiums to borrow yen overnight since UBS AG, the European bank hardest hit by the subprime crisis, reported a record loss on Feb. 14.

Foreign lenders pay 0.61 percent to borrow, while Japan's banks pay 0.23 percent, according to Tokyo Tanshi Co.

`Not Enough'

The BOJ will offer dollars to 40 financial institutions including Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc. and Goldman Sachs Japan Co., the central bank said on its Web site today. The first operation will total $30 billion on Sept. 24, the Nikkei newspaper said on Sept. 20.

Some traders remain skeptical that the BOJ's dollar operations will be enough to ease the supply of credit.

``This may not be enough,'' said Toshihiko Sakai, head of trading in foreign-exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. ``This should be okay for funding at the end of September, but what's going to happen at the end of October when year-end financing may be needed.''

To contact the reporter on this story: Nate Hosoda in Tokyo at nhosoda@bloomberg.net